Is Alibaba Cheap Enough for Financial Pros? - InvestingChannel

Is Alibaba Cheap Enough for Financial Pros?

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Financial Pros’ Top Chinese Stock Searches in the Last Month

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Is Alibaba Cheap Enough for Financial Pros?

How many tech companies do you know trade at 7x-8x cash and have easily grown revenues double-digits for years?

Not many. And few that project mid-single digit forward revenue growth.

Yet, that may not be cheap enough for financial pros who made Alibaba (BABA) their top-searched Chinese stock in the past month.

Shares of the Chinese mammoth plunged after the latest earnings announcement despite sizable revenue and earnings growth.

So, why aren’t big money managers interested in this stock?

Alibaba’s Business

Often called the Amazon of China, Alibaba specializes in e-commerce for B2B, B2C, and C2C through various channels.

Alibaba is one of the world’s largest retailers and e-commerce companies and was also rated as the fifth-largest artificial intelligence company in 2020.

The company’s revenues breakdown as follows:

  • Taobao and Tmall Group (43.4% of revenues): Their well-known online marketplaces Taobao and Tmall for retail and commercial customers.
  • Alibaba International Digital Commerce Group (10.9% of revenues): Handles Alibaba’s global e-commerce footprint, including popular sites like AliExpress and Lazada. 
  • Local Services Group (6.9% of revenue): Includes services like, which is huge for food delivery in China.
  • Cainiao Smart Logistics Network Limited (10.1% of revenues): The logistical wizard making sure all those packages get where they need to go, fast.
  • Cloud Intelligence Group (12.3% of revenues):  Cloud computing, offering cutting-edge tech solutions.
  • Digital Media and Entertainment Group (2.6% of revenues): Alibaba’s play in the digital entertainment field, including platforms like Youku, sort of China’s answer to YouTube.
  • All Others (21.4% of revenues): This segment is a mix of various businesses like Freshippo and Alibaba Health.

Alibaba’s a great business. But it’s not been a favorite of the Chinese government.

President Xi helped scuttle Ant Group’s IPO in 2020, while Jack Ma disappeared for months to no one knows where.

The company’s latest attempt to spinoff its separate business units seems like a great idea. But it’s already garnering attention from government regulators, and not the good kind of attention.



Source: Stock Analysis

There’s no denying Alibaba’s incredible growth. Only recently have revenues decelerated to single-digit YoY growth.

However, margins haven’t kept pace, uneven yet declining noticeably over time. That’s led to profit margins as low as 7.3% and as high as 14.5% in the last few years.

Free cash flow remains a bright spot at 19.7%. With hardly any debt, management has chosen to buy back shares, which would normally be a boon for shareholders. However, U.S. investors hold only indirect ownership. And many worry they won’t ever see tangible returns.



Source: Seeking Alpha

Alibaba is cheap no matter how you value the company. But then again, so is every other Chinese company on this list.

JD.Com (JD), for example, trades at just 5.7x cash and 14.0x earnings.

Baidu (BIDU) trades at 9.3x cash and 14.6x earnings.

It speaks to the uneasiness investors have owning Chinese companies and the subsequent premium they demand for the risk.



Source: Seeking Alpha

Despite Covid restrictions, revenues grew steadily for all these companies over the last few years.

So, it’s interesting to see forward sales estimates drop into the mid to low single digits. This speaks to a larger economic stall forecasted for the Chinese economy.



Source: Seeking Alpha

Despite great profitability, Alibaba’s returns on equity, assets and total capital are fairly lackluster. Normally, this is just a sign of a high-growth company in its early years. However, it can also be an indication of financial manipulation.


Our Opinion 10/10

Alibaba is exceptionally cheap…too cheap to ignore.

Shares took a dive as revenue estimates declined.

Yet, if you take a multi-year outlook, there’s no reason to believe the slowdown will be permanent.

Sure, there is huge political risk owning a Chinese company. However, we believe it’s been priced well enough to compensate you for that risk.

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